Thank you for inviting me to speak to you today.
According to Environment and Climate Change Canada's most recent national inventory report, the oil and gas sector produces over a quarter of all greenhouse gas emissions in Canada. As high as that value is, it includes only greenhouse gases emitted during production of oil and gas, and not the much larger emissions that are released when oil and gas are eventually combusted for energy. Moreover, since 2005, emissions from the oil and gas sector have grown faster than those of any other sector. Future growth in emissions from the oil and gas sector threatens the possibility for Canada to achieve its climate change targets.
Nevertheless, I do not believe a new mandatory cap on oil and gas sector emissions is required. Instead I believe we can achieve deep cuts in emissions from this and other sectors through continued improvement in existing regulations.
To understand my position, it's important to recognize that oil and gas emissions, along with emissions from other large industries, are already regulated under the federal output-based pricing system as well as provincial carbon pricing systems that cover large emitters. A higher carbon price in these systems results in more incentive to reduce emissions.
In contrast, the oil and gas cap under consideration would likely be implemented using a cap-and-trade approach. In this case, an overall emissions cap would be allocated across all oil and gas producers, who could trade permits with one another to achieve the cap. Just like the existing output-based pricing system, companies would determine how much to reduce emissions based on the prevailing price of emissions permits, otherwise known as the “carbon price”.
In other words, at the level of the individual oil and gas producer, the existing system of output-based regulations and the proposed oil and gas cap both provide incentives to reduce emissions via the same mechanism: a carbon price. My basic argument is that we don't need a new sector cap on emissions since we already have in place a policy that can motivate emission reductions in exactly the same manner as would occur under this proposed policy.
While a sector cap on oil and gas emissions would provide similar incentives to firms as existing regulations, there are two reasons it might be promoted anyway. First, a cap on emissions from the oil and gas sector may enable the pursuit of more aggressive emission reductions in this sector than under existing regulations. In my view, however, we should not single out a particular sector for more ambitious emission reductions, which is a costly way to achieve our environmental goals, but instead seek to generate more emission reductions from across all sectors. This can be done by strengthening our existing cross-sectoral regulations.
The second reason a cap on oil and gas might be promoted is that it might provide more certainty of achieving a given emission reduction target in the oil and gas sector. This is true in theory, although in practice cap-and-trade systems typically contain provisions like compliance flexibility or credit banking that reduce the certainty that a particular emission target is reached in any given year.
In other words, there is little to be gained from introducing a new cap on the oil and gas sector that cannot already be achieved by strengthening the existing output-based regulatory system for large industry, and while there is little to be gained, there is a cost associated with introducing a sector cap on oil and gas emissions.
First, there's an administrative cost. Setting up a new cap-and-trade system for the oil and gas sector would require new regulatory resources and there is no guarantee that it could be implemented quickly. With increased climate ambition, there are many demands on regulators, and regulatory time could be better spent.
Second, there is a cost associated with concentrating emission reductions in the oil and gas sector rather than spreading them across all sectors, as under the current output-based regulations.
Third, concentrating emission reductions in one regionally concentrated sector could increase political division associated with climate policy.
Overall, I see little reason to introduce a new cap on oil and gas emissions. Instead, to more quickly reduce oil and gas emissions, I recommend that the federal government continue to revise and strengthen the output-based regulations that reduce emissions both in the oil and gas sector as well as other sectors. Two actions are most critical.
First, the federal government should develop output-based benchmarks and prices that are consistent with 2030 and 2050 emission reduction targets. By 2050, emissions intensity benchmarks should reach zero across all regulated sectors, with limited compliance flexibility. Effectively, this implies a hard cap of zero on all industrial emissions by 2050, not just oil and gas emissions.
Second, the federal government should increase efforts to ensure that provincial large emitter carbon pricing policies achieve the same emission reductions as the federal benchmark.
In sum, the proposed cap on oil and gas emissions is unnecessary. Instead the focus should be on increasing the ambition of our existing regulations for all large emitters.
Thank you very much.